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The Market for 'Lemons': A Lesson for Dividend Investors
Central banks the world over are buying high-quality bonds, thereby removing them from the market and forcing savers to find alternative strategies to meet their income needs. In this environment of financial repression and near-zero interest rates, dividend-yield (or equity income) investing has become increasingly popular. Investors are understandably reallocating their portfolios from lower yielding bonds to higher yielding equities. But in selecting equities with a high dividend yield, investors should be aware of the risk of concentrating their portfolios in low-quality companies.
The Knowledge Effect: Excess Returns of Highly Innovative Companies
What drives stock returns? Answering this question has been a goal of investors ever since Harry Markowitz introduced his Modern Portfolio Theory in the 1950s. Later, William Sharpe’s Capital Asset Pricing Model illustrated that the market itself is the first and foremost element in explaining a stock’s performance. However, empirical research over the past several decades has identified many other effects beyond simply the market that exhibit a strong explanatory power of stock returns.
When Following the Herd is Risky, Where is the Safety?
by Zachary Karabell of Envestnet,
Risk and safety. Safety and risk. In investing, as in life, balancing both is an ongoing challenge. We know intuitively that all of either one or the other rarely yields the results we want, but finding the right mix is easier said than done.
Me, Lord Marlboro, and the Dow?!
by Jeffrey Saut of Raymond James,
Holy cow, somebody must have slipped American Pharaoh a “sugar cube” last Saturday as horse and jockey (Victor Espinoza) made the turn into the withering stretch at Belmont Park and pulled away from the rest of the pack. Hopefully, somebody will feed a “sugar cube” to the stock market this week because it certainly needs it.
Why Stocks are Not "Cheap Relative to Bonds"
by John Hussman of Hussman Funds,
One of the constant refrains we hear at present is that while stocks may be richly valued on an absolute basis, they are “cheap relative to bonds.” At least one professor recently told students that valuations are meaningless because the P/E on cash is 100. Technically, with T-bill yields at just 0.01%, the P/E on cash is more like 10,000, but let’s not quibble. Using simple P/E ratios or inverted interest rates as a standard of value only makes sense if you have no appreciation for how securities are valued.
Weekly Market Summary
by Urban Carmel of The Fat Pitch,
US equities have refused to become either oversold or overbought during the past several months. They are now down two weeks in a row and at point similar to where there has recently been a bounce higher. Failure to do so now would mark a change in character for this rangebound market. Ultimately, the washout low probably still lies ahead.
Bond Tug-of-War
by Anthony Valeri of LPL Financial,
The bond market tried to end the month of May on a high note but did not quite make the mark. The last 10 days of May 2015 witnessed fairly steady improvement in high-quality bond prices after a difficult five weeks, but it was still not enough to offset losses for the month. The broad Barclays Aggregate Bond Index still finished 0.24% lower in May and posted consecutive monthly declines for the first time since the last two months of 2013.
Employment, Wages and Housing Leading The Economy Higher
by Urban Carmel of The Fat Pitch,
The majority of US economic data points to strength. Employment growth is the best since the 1990s. Wages and compensation are growing at the highest rates since the recession ended. And housing, both new construction and sales, are the best in 8 years. The overall economic trend remains positive.
Recovery Rallies, Is Six Years Enough
by Craig Callahan of ICON Advisers,
Contrary to the bearish headlines, we at ICON believe that we are in the midst of a long-term recovery. With our valuation methodology as our guide, we believe there is enough value in the market to sustain a continued recovery. Furthermore, as we saw with the post 1987 market recovery, bull markets can last longer than 6 years. We believe there is still room for market growth in the current environment.
Billions and Billions Pour into India and China
It’s been a little over a year since Narendra Modi took office in India, and so far the results have been mostly positive for the South Asian country and the surrounding region. Among other achievements, Modi’s government has managed to enact important policy reforms, increase public investments in infrastructure, lower food inflation and generally open India up to business on a global scale.
Greenbriar Gleanings
by Jeffrey Saut of Raymond James,
I always look forward to reading Frederick “Shad” Rowe’s monthly investment letter to his partners. Shad founded Greenbrier Partners, Ltd. In 1985 and has captained the investment fund ever since. He is known as one of the best “stock pickers” on Wall Street, a moniker that is well deserved.
Is the Stock Market Cheap?
Here is a new update of a popular market valuation method using the most recent Standard & Poor's "as reported" earnings and earnings estimates and the index monthly average of daily closes for the past month. For the earnings, see the table below created from Standard & Poor's latest earnings spreadsheet.
Greece: An Update
In February, we reported on the situation in Greece. Over the past few months, there has been no resolution to Greece’s debt problem, despite numerous deadlines and meetings. In our earlier report, we framed the conflict between Greece and the EU in terms of game theory. In this report, we will begin by recapping our earlier analysis. Using this framework, we will discuss how a third option has evolved which will likely force PM Tsipras to acquiesce to the EU. As always, we will conclude with potential market ramifications.
Are Bond Investors Crying Wolf?
Since we last wrote to you there has been quite a dramatic increase in interest rates in most markets and in Germany in particular. In this letter we look into whether this is the beginning of something much bigger.
For those of you with too little time on your hands we conclude that it is NOT. Economic growth will stay low for many years to come, and central banks have no intention of suddenly flooding the bond market with sell orders.
On My Radar: Inflation and The Big (Bigger) Short
"Negative-yield bonds now account for some €1.5 trillion of debt issued by governments in the euro area, equivalent to almost 30% of the total outstanding. Many expect even more of the global bond market to fall into negative yield territory. Half of all government bonds in the world today yield less than 1%.”– John Mauldin
The Liquidity Time Bomb
by Nouriel Roubini of Project Syndicate,
Advanced countries’ central banks have managed to keep interest rates low, reduce the volatility of bond markets, and lift many asset prices. But a series of recent shocks suggests that macro liquidity has become linked with severe market illiquidity.
When Paper Wealth Vanishes
by John Hussman of Hussman Funds,
As in equal or lesser speculative bubbles across history, there’s a common delusion that elevated stock prices represent wealth to their holders. That is a fallacy, and we can hardly believe that given the collapses that followed the 2000 and 2007 extremes, investors (and even Fed policymakers) would again fall for that fallacy so readily. The actual wealth is in the cash flows that are ultimately delivered into the hands of shareholders over time.
Three Keys Why Retired Investors Should Put Maximum Focus and Weight On Dividends
by Chuck Carnevale of F.A.S.T. Graphs,
In today’s low interest rate environment, prudent long-term investors, especially those in retirement, are best served by putting maximum weight and focus on dividends. There are important reasons why I support this position, and those reasons will be the focal point of this article. However, putting maximum weight and focus on dividends does not simultaneously mean at the exclusion of other important fundamental metrics.
Tantrum Potential at Home, Opportunity Overseas
by Russ Koesterich of BlackRock,
U.S. equities continue to climb, but BlackRock Global Chief Investment Strategist, Russ Koesterich, discusses why the best opportunities may reside outside the United States, which, in fact, has been the case so far this year.
World War D—Deflation
by John Mauldin of Mauldin Economics,
Everywhere I go I’m asked, “Will there be inflation or deflation? Are we in a bull or bear market? Is the bond bulk market over and will interest rates rise?" The flippant answer to all those questions is “Yes.” And that can be the correct answer as well, but it depends on what your time frame is and what tools you use to measure the markets and inflation.
The Importance of Liquidity
by Byron Wien of Blackstone,
Since the axiom “Don’t fight the Fed” came into common parlance, we have all been aware that central bank policy is an important component of market performance. Most of us started out as security or business analysts and believed that fundamental factors like the pace of the economy, earnings growth and interest rates were the drivers of equity values.
Actively Manage Your Activist Credit Risk
Bondholders fret about leveraged buyouts (LBOs) late in the credit cycle. But this time around, with new federal lending rules slowing LBO activity, shareholder activism is stealing the spotlight—and the cash flows. The threat to bond portfolios is just as serious.
Global Economic Perspective: May
Having come through 2015’s first quarter with virtually no growth, the US economy is generally expected to pick up during the rest of this year. Indeed, as we move into a new quarter and shake off the effects of a significant West Coast dock strike and severe winter weather, forward indicators have pointed toward better growth.
Don’t Fear Rising Rates — Embrace Them
by Scott Eldridge of Invesco Blog,
Interest rates have been on the march since late January, thanks largely to global rate markets and a looming US Federal Reserve. In general, bonds are vulnerable to falling market prices as a result of higher rates, but there are income investments that can be used to take advantage of, rather than fall victim to, rising rates. They’re known as floating rate instruments.
Voting Machine, Weighing Machine
by John Hussman of Hussman Funds,
The fact is that valuations drive long-term returns, but over shorter horizons, stock prices are the result of whatever investors collectively believe, however reckless or detached from historical evidence those beliefs may be. As long as enough market participants are attached to the idea that risk is their friend (or enemy) regardless of the price, there is no natural limit to how overvalued (or undervalued) stocks can become. There is only one way to address this: measure investor risk preferences directly through observable market internals.
The Affordable Care Act and Low Interest Rates: A One-Two Punch for Health Insurance Portfolios
Two common themes emerged from a recent PIMCO survey of U.S. health insurers: Underwriting performance will be a larger factor in asset allocation, and there will be more emphasis on liquidity and income. For now, health insurers generally expect increased premium volumes and shifts in insured profiles as a result of the Affordable Care Act. Re-examining investment policies and tiering liquid assets can help investment portfolios maintain flexibility while potentially contributing more to the bottom line.
GDP Seasonal Adjustment: There's No Smoking Gun
by Urban Carmel of The Fat Pitch,
First quarter GDP growth was stronger than originally estimated. When adjusted for seasonality, the economy grew 1.8%, which is consistent with the average growth rate over the past three years. It is also consistent with a wide variety of economic data (employment, wages, housing, consumption) released in the past several months. And, finally, it is consistent with the message being sent by the treasury market.
Schwab Market Perspective: As the World Turns
A market that grinds higher isn’t all bad as it allows time for earnings to catch up to prices; but complacency must be reined in. Sharp movements could and should come as we move closer to a potential Federal Reserve rate hike. We believe the US economy will rebound from the weak soft first quarter, helping to support stocks and a rate hike, but the turn needs to gain traction. Meanwhile, Congressional approval of fast track trade authority could pave the way for improvements in the Japanese recovery.
The (Investment) World Is Changing And You Need To Get On Board
by Roger Nusbaum of AdvisorShares,
Fast Company posted an article that looked at existing jobs that are likely to change dramatically or disappear altogether over the next ten years. Change happens of course often spurred along by technology and/or innovation.
Time to Go Active
by Heather Rupp of AdvisorShares,
Earlier this week we saw one of the major financial publications feature an article about how active management has outperformed passive management so far in 2015. While their article and data focused on equity funds, we believe that the same sort of opportunity for active fixed income managers exists over the balance of 2015.
Smart Money Most Committed to Falling Rates Since The Last Peak in Long Bond Yields
by Team of GaveKal Capital,
Commercial traders (AKA the smart money) has massively flip flopped their positioning since the end of last year with respect to the long bond. In aggregate, commercial traders have moved from a net short position (benefiting when rates rise) of about 50K derivative contracts to a net long position (benefiting when rates fall) of 22K contracts.
China Bonds Still Offer Opportunities
by Hayden Briscoe of AllianceBernstein,
As more corporate bond issuers in China run into financial trouble, investor anxiety about the possibility of a broader market collapse has understandably increased. We don’t think it’s time to man the lifeboats, however; on the contrary, we believe that Chinese bonds still offer good opportunities for research-driven investors.
Can We Really Trust Nike’s Stock Price?
by Chuck Carnevale of F.A.S.T. Graphs,
One of the most common mistakes that I see common stock investors make is failing to formulate the important distinction between a company and its publicly traded stock. There are many great companies out there with fabulous stories surrounding their wonderful businesses. As a result, it can be very easy to fall so much in love with a great company that you can’t resist investing in the stock even when the valuation is extreme.
The Idolatry of Interest Rates Part I: Chasing Will-o’-the-Wisp
by James Montier of GMO,
First is the idolatry of the “equilibrium/natural/neutral” rate of interest displayed by central bankers around the world. The second idolatry is the modern-day belief in the world’s greatest con: that monetary policy matters.
Results 9,351–9,400
of 11,878 found.
